Definition:Per risk excess of loss
📋 Per risk excess of loss is a reinsurance arrangement that protects the ceding company against large losses on any single risk — typically an individual policy or insured location — that exceed a predetermined retention. Unlike per occurrence excess of loss, which aggregates all losses from a single event across the insurer's portfolio, per risk excess of loss operates at the individual risk level, responding when a particular policy or insured interest generates a loss beyond the cedent's comfort zone. This form of excess of loss reinsurance is especially prevalent in property and marine lines, where individual insured values can be substantial.
⚙️ The mechanics are straightforward in principle but require careful definition in practice. The treaty specifies a retention — say $2 million — and a limit — say $8 million excess of $2 million — per individual risk. When a single insured property suffers a fire loss of $7 million, the cedent absorbs the first $2 million and recovers $5 million from the reinsurer. What constitutes a "risk" is a crucial contractual definition: the treaty's risk definition clause determines whether multiple buildings at one location count as one risk or several, whether common ownership links separate properties, and how shared exposures like business interruption values are allocated. Ambiguity here can generate disputes, particularly after large catastrophe events where many individual risks are affected simultaneously. Per risk excess of loss treaties typically sit below the cedent's catastrophe excess of loss program in the overall reinsurance architecture, addressing severity on individual risks while the catastrophe layers handle event-level accumulations.
💡 This structure gives insurers the confidence to write larger individual risks than their own net retention would otherwise permit, effectively expanding their underwriting capacity without proportionally increasing balance-sheet exposure. It is particularly valuable for regional or mid-sized carriers in markets like the United States, continental Europe, and parts of Asia, where a single industrial complex, high-value dwelling, or commercial portfolio could generate a loss that dwarfs the insurer's comfortable retention. Pricing reflects the loss experience on the cedent's book, the volatility of the underlying line, and the attachment probability derived from actuarial models. Because per risk excess of loss protects against single-risk severity rather than correlated multi-risk events, reinsurers evaluate it differently from catastrophe covers, focusing more on the cedent's underwriting quality, risk selection, and PML assessments for individual insured locations.
Related concepts: